Stagflation

The international reaction to the financial crisis leaves me more and more puzzled. Everyone seems to be a Keynesian now. This reminds me of the reason Keynes got out of favor.

The 1973 oil crisis (that greatly increased the oil price) led to an international economic crisis. This became even worse when the Iranian revolution led to the second oil crisis that again doubled the oil price. Western governments generously spent money in order to stimulate the economy, but it didn't lead to growth, only to inflation. This became known as stagflation. In the end it was the Reagan-Thatcher doctrine of "economic reform" that got the world out of the crisis with its emphasis on less government.

Now it seems that the Reagan-Thatcher doctrine has had its time. The present crisis had to do with not enough government and there is demand for a stronger government role. But I wonder whether the financial stimuli will really help.

The 1960s and 1970s were the time of the rise of Japan. Much manufacturing jobs had gone there. Much of the compensation had been in the government related area. The financial drain of oil crisis exposed this as untenable. It looks like we have now a similar situation: the productive jobs have gone to China. Now the financial sector was the main creator of new jobs, but they were just as unproductive.

My expectation is that the financial stimuli won't work and that instead we will have to reform the financial sector.